Can retired husband work for sole proprietor wife without being paid without being penalized?

[xmasbaby0]

Penalized in what way?  There is nothing to enter on your spouse's Schedule C about not paying you.  

she cannot enter an expense she does not have.   File a joint return, and enter all of the combined income from both spouses on that return, including any retirement income and the self-employment income that the sole proprietor has.

If you have self-employment income for which you will pay self-employment tax for Social Security and Medicare,  you will need to use online Premium software or any version of the desktop software download so that you can prepare a Schedule C for your business expenses.

https://ttlc.intuit.com/questions/2926899-how-does-my-side-job-affect-my-taxes

https://ttlc.intuit.com/turbotax-support/en-us/help-article/form-1099-nec/1099-nec/L5qTsBiSe_US_en_U...

https://ttlc.intuit.com/community/self-employed/help/how-do-i-report-income-from-self-employment/00/...

https://ttlc.intuit.com/community/self-employed/help/what-is-the-self-employment-tax/00/25922

https://ttlc.intuit.com/questions/2902389-why-am-i-paying-self-employment-tax

https://ttlc.intuit.com/questions/1901340-where-do-i-enter-schedule-c

https://ttlc.intuit.com/questions/3398950-what-self-employed-expenses-can-i-deduct

https://blog.turbotax.intuit.com/self-employed/self-employed-tax-deductions-

calculator-2021-2022-50907/

https://ttlc.intuit.com/questions/1901110-do-i-need-to-make-estimated-tax-payments-to-the-irs

If you live in a state with a state income tax, you might need to make estimated payments to your state.

https://turbotax.intuit.com/tax-tools/calculators/self-employed/

https://ttlc.intuit.com/community/business-taxes/discussion/self-employed-don-t-miss-these-tax-moves...

[LKP2]

Penalized was probably the wrong way to put it. Does the SSA look down on my husband getting retirement benefits and then working for me a self employed sole proprietor without being paid. Should I pay him as an employee instead. What is the legitimate thing to do?

[xmasbaby0 · Accepted solution]

"Does the SSA look down on my husband getting retirement benefits and then working for me a self employed sole proprietor without being paid."

How doe you think Social Security would be aware that your spouse helps you with your business----unless YOU claim to pay him and put that expense on a Schedule C on your tax return?   If you are not paying him, and not entering anything about it on your tax return, it is irrelevant to Social Security--they do not care what he does in his spare time---he could play golf all day, mow grass and trim shrubs, tinker around in the garage,  take cooking classes, or help you.  If he is not being paid, they don't care.

However, if you decide you want to pay him to work for you, then you will have to put that expense on your Schedule C, and he will have to report that same income on your joint tax return.  You will either issue a W-2 or a 1099NEC to him, and that will be entered on your tax return too.  If you issue a 1099NEC to him, then he also pays self-employment tax and has to prepare his own schedule C for his business expenses.    Depending on how much he is paid and if he is not at full retirement age, his SS benefits could be affected, and his SS may taxed more.

[xmasbaby0]

TAX ON SOCIAL SECURITY

Up to 85% of your Social Security benefits can be taxable on your federal tax return.  There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits.  When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable. 

 What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit. (For 2021 it was  $18,960.  For 2022 it was  $19,560  —  for 2023 $21,240)  For 2024, $22,320.

After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare.  If you work as an independent contractor then you will pay self-employment tax for Social Security and Medicare.

To see how much of your Social Security was taxable, look at lines 6a and 6b of your 2024 Form 1040

https://ttlc.intuit.com/questions/1899144-is-my-social-security-income-taxable

[Opus 17]

If you materially participate in your wife's business, there is an expectation that you will be paid fair compensation for the value of the work. Your wife can hire you as a W-2 employee, or she can treat you as a 1099-NEC subcontractor for your part of the business.  She can deduct wages or the cost of the subcontract as a business expense.

If you are less than your retirement age, having income earned from working may reduce your SS benefit.   However, if you are at or over your "full retirement age", then working does not reduce your benefit.

https://faq.ssa.gov/en-us/Topic/article/KA-01921#!%23

I don't know what kind of penalties might apply to your wife if you work for her business and she does not properly compensate you.  (It also may depend on the type of business.  The rules for family members working for a sole proprietorship may be different than family members working for an S-corp.  And it may depend on state law as well.  And it may depend if you live in a community property state.  You may want to double-check with with legal or tax professional if you perform substantial work and don't get paid.)

[xmasbaby0]

You have not mentioned just how much time your spouse is devoting to helping you in your business.  Does he "materially participate?"  See below:

https://www.investopedia.com/terms/m/material-participation-test.asp